A Look At Equally-Weighted Views Of Dollar, Euro, Pound And More

There have been some extraordinary technical developments for some of the FX market’s most prominent crosses, and sometimes these moves are coming in contradiction to fundamentals. For some, the answer to reconciling this disparity is to simply drop one form of analysis completely. I think that is hasty and unproductive. The picture that we are drawing of individual currencies is often drawn from particular pairings. Yet, one FX pair represents two contributions the strength of the base currency (the first in the pair) and the strength of the quote currency (the second).

To what degree does a sharp move from say EUR/USD represent strength for the Euro or weakness from the Dollar? This pair has soared through collective resistance around 1.2100 and 1.2200 which is the midpoint of both the 2014-2017 range as well as the historical range from when the Euro began trading in earnest in 1999. An anecdotal evaluation of headlines shows that there is far more attribution to be made to the ‘Greenback’s decline’ than the ‘Euro’s advance’, and the fundamental justification is thereby dispensed in equal proportion. But what if we are getting the assessment backwards? What if the performance of a currency against a single counterpart is an aberration while it maintains healthy strength against all other counterparts?

Below, I give you the equally-weighted index of the 7 most common currencies utilizing the most liquid ‘majors’. It can be argued whether some trade weighting (as with the ICE’s DXY Dollar Index) or some other skew is appropriate to reflect the ‘true’ value. We can’t answer that here as there is no specific answer. However, we should reflect on the fluidity of valuation when we are making black-and-white evaluations for our trades. With a more dynamic assessment, we will tend to make better trading decisions.

The Dollar – DXY Trade-Weighted Index vs Equally-Weighted Synthetic

Looking at the first currency, we can see that the general structure of the weekly charts between the trade-weighted (meaning the EUR/USD is heavily represented to the tune of 2/3rds the index), we can see that the structure is similar. However, the differences in this case hold serious technical consideration. On the DXY, we have a remarkable head-and-shoulders neckline break while crossing the mid-point of a decade long range. On the equally-weighted index, we haven’t even hit a three-year low much less take out even the 38.2 percent Fib retracement of the 2011 to 2016 range (the lows and highs are event similar).